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Are marijuana stocks recession-proof vice stocks, or another luxury we can’t afford?

By Alexis Grace

Oct 09, 2018

Cannabis stocks have been controlling much of the financial media attention due to the new and still fairly taboo nature surrounding the industry. Over the past few years, they have become the hottest new member of the “vice” stocks family, with alcohol, tobacco, and gambling as their older siblings. However, there might be some sibling rivalry present which is causing investors to question if cannabis is the best of the vice stocks in which to invest.

While the marijuana industry undoubtedly has a plethora of growth opportunities, investors should be informed about how the marijuana industry is performing in comparison to other vice industries. Especially if a recession occurs at any point in the near future, many alcohol and tobacco stocks have already proven to be good assets to have in an investor’s portfolio during economic slumps.

Unlike cannabis which has only recently started to be publicly traded, alcohol and tobacco have a deep history in the stock market. That history has shown that vice stocks tend to be more recession-resilient in comparison to other sectors. While cannabis stocks could follow similar suit since recreational marijuana use can be behaviorally compared to alcohol consumption, there hasn’t been enough history to conclude how cannabis companies would perform in a recessionary stock market.

Additionally, since marijuana has been illegal throughout most of history, it is difficult to find legitimate research studies on the link between the economy and marijuana consumption since marijuana smokers have been forced to be discrete. However, it probably would not surprise most if there was a positive correlation between unemployment rates and marijuana consumption.

Research gives mixed signals on correlation between economic stability and cannabis users per capita

Interestingly, the relationship between marijuana consumption and economic circumstances is not all that obvious. While some research has shown that higher wages correspond to less marijuana consumption, others have shown the exact opposite. That relationship is chiefly driven by other external factors such as the individual’s age and sex. For example, women show a positive relationship between wage and marijuana use (i.e., women who make more money are more likely to smoke marijuana) while men show a negative one. Young men who are still developing psychologically were especially prone to having worse earnings as marijuana consumption increases.

Unfortunately, no large marijuana-focused companies have been traded publicly before or during the Great Recession of 2008, so there isn’t historical price data to analyze how marijuana stock might perform. We can only analyze other vice industry stock returns during recessionary periods to hypothesize how marijuana stocks might do.

Beverage companies have shown a history of being recession-resilient

Many of today’s largest alcoholic beverage companies have been publicly traded for quite some time. Diageo plc (NYSE:DEO) has been trading since 1991, Constellation Brands, Inc. (NYSE:STZ) since 1992 and Ambev S.A. (NYSE: ABEV) since 1997, for example. While the Great Recession of 2008 was so destructive that even recession-resilient alcohol stocks took a hit, beverage companies generally outperformed the overall market. Some companies have also benefited from the weak economic periods.

Source: Yahoo! Finance

Research has shown that while alcohol consumption as a whole decreases during a recession, the frequency of binge drinking increases. One study looked at drinking habits surrounding the Great Recession and found that unmarried men younger than 30 years old who recently became unemployed were at the highest risk for increased binge drinking.

Another study found similar correlations between the Great Recession and increased alcohol consumption even for those that did hold onto their jobs. The study concludes that daytime drinking decreased, likely due to job-holding people not wanting to risk becoming unemployed themselves, but drinking after work hours increased. They found that these findings were consistent with theories that people are more likely to self-medicate in response to work-related stressors.

Back in the heart of the recession in mid-2008, Anheuser-Busch (NYSE:BUD) soared (although that was partially due to the InBev acquisition). At that same time, however, Molson Coors (NYSE:TAP), Brown-Forman (NYSE:BFB), Sam Adams (NYSE:SAM) and winery Willamette Valley Vineyards (NasdaqCM:WVVI) were also up year-to-date. Reporters were not surprised by this behavior since alcohol is a consumer staple (albeit an addictive one), so it would make sense that it holds up reasonably well during a recession.

Tobacco use patterns during economic hardship might also lend insight into how a recession would impact the marijuana industry

While there might be some evidence of decreased cigarette smoking during economic crises in some parts of the world, most of the research that looks at U.S. patterns has shown a weak effect of financial downfalls on smoking prevalence. One study found that between 2005-2010 there was an increase of .6 million smokers where shifts were mainly from a 1.7 million decrease in the number of smokers within the employed group and a 2.4 million increase in smokers within the unemployed group.

These results indicate that unemployed people are more likely to increase cigarette consumption which could also support an increase in marijuana use if unemployment rises due to a recession.

Altria Group, Inc. (NYSE:MO) is the second largest tobacco company in the world next to Philip Morris International Inc. (NYSE:PM), but PM has only been publicly traded since 2008. For this reason, we look at historical Altria values compared to the S&P500 Index as a proxy for how tobacco companies might perform during an economic crisis compared to the market. As shown, there was a substantial loss for Altria in 2008 just like there was for the stock market at large. However, it is clear that Altria recovered much more quickly than the overall market after the 2008 slump.

Marijuana and tobacco companies have started to have a more prevalent association with each other with talks of big tobacco companies looking to invest in the marijuana industry. Company executives at Altria have announced their intentions of exploring options with cannabis.

Source: Yahoo! Finance

We know what we don’t know about marijuana stocks during a recession at this point

While no stocks are completely “recession-proof,” some stocks are more likely to do better in a market slowdown. Without sufficient marijuana stock history going back through a recessionary time in the markets, we do not yet know how marijuana would hold up.

However, there’s potential for them to be recession-resilient given its similarities and associations with the beverage, tobacco and gambling industries. Better yet, marijuana has the healthcare card to play because, like vice stocks, healthcare stocks tend to perform well while the rest of the market struggles.